NAV loans are a poor answer to private equity problems

Net asset value (NAV) financing, or debt raised by private equity funds backed by entire portfolios of companies, has grown rapidly in recent years as fund managers struggle to sell companies at higher prices than they paid for them.

Taking out further loans in a company that is already heavily indebted is raising increasing concerns among PE investors and regulators.

PE managers now have to hold companies longer than they used to: perhaps six to seven years, instead of the three to five they promised investors when they raised funds. Like all speculators, they tend to characterize their bad deals as strategic long-term holds. But the neutral interest rate has not returned to its 15-year lows. Higher interest rates have been lowering the discounted value of future cash flows from portfolio companies for a longer period of time. So the prices that buyers or IPO investors will pay also remain low.

And PE funds exist to buy when companies are cheap, not to sell them.

In addition to buying companies when stock investors undervalue them and selling them when stock markets soar, PE funds also engage in another activity: raising money from limited partners and charging them a 2% fee to hold their cash.